ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For
the
fiscal year ended June 30, 2008

o

TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For
the transition period from _________________ to
_________________

Commission
File Number 001-33468

POINT.360

(Exact
name of registrant as specified in its charter)

California

(State
or other jurisdiction of

incorporation
or organization)

01-0893376

(I.R.S.
Employer Identification No.)

2777
North Ontario Street, Burbank, CA

(Address
of principal executive offices)

91504

(Zip
Code)

Registrant's
telephone number, including area code (818) 565-1400

Securities
registered pursuant to Section 12(b) of the Act:

Common
Stock, no par value.

Securities
registered pursuant to Section 12(g) of the Act:

None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.

Yes
¨
No
x

Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.

Yes
¨
No
x

Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes
x
No
¨

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large
accelerated filer

¨

Accelerated
Filer

¨

Non-accelerated
filer

¨

Smaller
reporting company

þ

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).

Yes
¨ No
x

The
aggregate market value of the voting common equity held by non-affiliates of
the
registrant as of the last business day of the registrant’s most recently
completed second fiscal quarter (December 31, 2007) was approximately $16
million. As of August 14, 2008, there were 10,493,410 shares of Common Stock
outstanding.

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x

DOCUMENTS
INCORPORATED BY REFERENCE

Portions
of the definitive Proxy Statement relating to the Company’s Annual Meeting of
Shareholders to be held on November 12, 2008 are incorporated by reference
in
Part III of this report.

EXPLANATORY
NOTE

This
Form
10-K includes restatements for the years ended December 31, 2005 and 2006,
the
six months ended June 30, 2007 and for the interim periods for the quarters
ended September 30, 2007, December 31, 2007 and March 31, 2008 that amend,
restate and adjust the following:

·

consolidated
balance sheets for stated periods;

·

consolidated
statements of invested and shareholders’ equity for the years ended
December 31, 2005 and 2006 and the six months ended June 30, 2007;

·

certain
financial data for the quarterly periods ended September 30, 2007,
December 31, 2007 and March 31, 2008; and

·

certain
footnotes to the above financial
statements.

This
Form
10-K also reflects the restatement of selected balance sheet data in “Selected
Financial Data” in Item 6 for the fiscal years ended December 31, 2003, 2004,
2005, 2006 and June 30, 2007.

We
have
not filed amendments to our previously filed Form 10-K/T for the six months
ended June 30, 2007 or to our previously filed Forms 10-Q for the interim
periods affected by the restatement. The consolidated financial statements
and
financial information, as previously filed, should no longer be relied upon.
The
related audit report of Singer Lewak, LLP, our independent registered public
accounting firm, with respect to the consolidated financial statements referred
to in this paragraph, should also no longer be relied upon. The previously
filed
information reported for the periods referred to in the previous paragraph
is
superseded by the information contained in this Form 10-K.

For
additional information, see Notes 13 and 14 to our consolidated financial
statements beginning on page 45 of this Form 10-K.

CAUTIONARY
STATEMENT

In
our
capacity as Company management, we may from time to time make written or oral
forward-looking statements with respect to our long-term objectives or
expectations which may be included in our filings with the Securities and
Exchange Commission (the “SEC”), reports to stockholders and information
provided in our
web
site.

The
words
or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,”
“forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar
expressions identify “forward-looking statements”. Such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. We wish to caution you not to place undue reliance
on
any such forward-looking statements, which speak only as of the date made.
We
are calling to your attention important factors that could affect our financial
performance and could cause actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.

The
following list of important factors may not be all-inclusive, and we
specifically decline to undertake an obligation to publicly revise any
forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence
of
anticipated or unanticipated events. Among the factors that could have an impact
on our ability to achieve expected operating results and growth plan goals
and/or affect the market price of our stock are:

our
ability to operate effectively as a stand-alone, publicly traded
company;
and

·

the
cost associated with becoming compliant with the Sarbanes-Oxley Act
of
2002 and the consequences of failing to implement effective internal
controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002 by the date that we must comply with that
section of the Sarbanes-Oxley Act.

Other
factors not identified above, including the risk factors described in the “Risk
Factors” section of this Form 10-K may also cause actual results to differ
materially from those projected by our forward-looking statements. Most of
these
factors are difficult to anticipate and are generally beyond our
control.

You
should consider the areas of risk described above, as well as those set forth
under the heading “Risk Factors” below, in connection with considering any
forward-looking statements that may be made in this Form 10-K and elsewhere
by
us and our businesses generally. Except to the extent of obligation to disclose
material information under the federal securities laws or the rules of the
NASDAQ Global Market, we undertake no obligation to release publicly any
revisions to any forward-looking statements, to report events or to report
the
occurrence of unanticipated events.

3

PART
1

ITEM
1. BUSINESS

The
Company was formed as a wholly-owned subsidiary (named “New 360”) of Point.360 (
“Parent Company”) in April 2007. The post production assets of the Parent
Company were contributed to New 360 on August 14, 2007, after which all New.360
common stock was distributed to the Parent Company’s shareholders. New 360
subsequently changed its name to Point.360 after the merger of the Parent with
DG FastChannel, Inc. (“DG FastChannel”). The Parent Company is hereinafter
referred to as Old Point.360.

Point.360
(“Point.360” or the “Company”) is a leading integrated media management services
company providing film, video and audio post-production, archival, duplication,
computer graphics and distribution services to motion picture studios,
television networks, independent production companies and multinational
companies. We provide the services necessary to edit, master, reformat and
archive our clients’ audio and video content, including television programming,
feature films, and movie trailers.

The
Company, previously part of Old Point.360, was spun off to Old Point.360’s
shareholders on August 14, 2007. References to the activities of the Company
prior to the spin-off refer to those of Old Point.360’s post production business
which constitutes the continuing operations of the Company.

We
seek
to capitalize on growth in demand for the services related to the manipulation
and distribution of rich media content without assuming the production or
ownership risk of any specific television program, feature film, advertising
or
other form of content. The primary users of our services are entertainment
studios that generally choose to outsource such services due to the sporadic
demand and the fixed costs of maintaining a high-volume physical
plant.

Since
January 1, 1997, Old Point.360 successfully completed acquisitions of companies
providing similar services. We will continue to evaluate acquisition
opportunities to enhance our operations and profitability. In 2004, Old
Point.360 acquired International Video Conversions, Inc. (“IVC”), a leading
digital intermediate and digital mastering facility. In 2005, Old Point.360
acquired Visual Sound, a provider of captioning services. In 2007, Old Point.360
purchased the business of Eden FX, a producer of sophisticated computer graphics
for feature films, television programming and commercials. As a result of these
acquisitions, we are one of the largest and most diversified providers of
technical and distribution services in our markets, and therefore are able
to
offer our customers a single source for such services at prices that reflect
our
scale economies.

Markets

We
derive
revenues primarily from the entertainment industry, consisting of major and
independent motion picture and television studios, cable television program
suppliers and television program syndicators. On a more limited basis, we also
service national television networks, local television stations, corporate
or
instructional video providers, infomercial advertisers and educational
institutions.

The
entertainment industry creates motion pictures, television programming, and
interactive multimedia content for distribution through theatrical exhibition,
home video, pay and basic cable television, direct-to-home, private cable,
broadcast television, on-line services and video games. Content is released
into
a "first-run" distribution channel, and later into one or more additional
channels or media. In addition to newly produced content, film and television
libraries may be released repeatedly into distribution. Entertainment content
produced in the United States is exported and is in increasingly high demand
internationally. We believe that several trends in the entertainment industry
have and will continue to have a positive impact on our business. These trends
include growth in worldwide demand for original entertainment content, the
development of new markets for existing content libraries, increased demand
for
innovation and creative quality in domestic and foreign markets and wider
application of digital technologies for content manipulation and distribution,
including the emergence of new distribution channels.

Value-Added
Services

Point.360
maintains video and audio post-production and editing facilities as components
of its full service, value-added approach to its customers. The following
summarizes the value-added post-production services that we provide to our
customers:

Film-To-Digital
Transfer. Substantially
all film content ultimately is distributed to the home video, broadcast, cable
or pay-per-view television markets, requiring that film images be transferred
electronically to a digital video format. Each frame must be color corrected
and
adapted to the size and aspect ratio of a television screen in order to ensure
the highest level of conformity to the original film version. We transfer film
to digital formats using Spirit, URSA and Cintel MK-3 telecine equipment and
DaVinci® digital color correction systems. The re-mastering of studio film and
television libraries to the HDTV broadcast standard has become a growing portion
of our film transfer business, as well as affiliated services such as foreign
language mastering, duplication and distribution.

4

Video
Editing.
We
provide digital editing services in Hollywood, Burbank and West Los Angeles,
California. The editing suites are equipped with (1) state-of-the-art
digital editing equipment, including the Avid® 9000, that provides precise and
repeatable electronic transfer of video and/or audio information from one or
more sources to a new master video and (2) large production switchers to
effect complex transitions from source to source while simultaneously inserting
titles and/or digital effects over background video. Video is edited into
completed programs such as television shows, infomercials, commercials, movie
trailers, electronic press kits, specials, and corporate and educational
presentations.

Standards
Conversion.
Throughout the world there are several different broadcasting "standards" in
use. To permit a program recorded in one standard to be broadcast in another,
it
is necessary for the recorded program to be converted to the applicable
standard. This process involves changing the number of video lines per frame,
the number of frames per second, and the color system. We are able to convert
video between all international formats, including NTSC, PAL and SECAM. Our
competitive advantages in this service line include our state-of-the-art systems
and our detailed knowledge of the international markets with respect to
quality-control requirements and technical specifications.

Broadcast
Encoding.
We
provide encoding services for tracking broadcast airplay of spots or television
programming. Using a process called VEIL encoding; a code is placed within
the
video portion of an advertisement or an electronic press kit. Such codes can
be
monitored from standard television broadcasts to determine which advertisements
or portions of electronic press kits are shown on or during specific television
programs, providing customers direct feedback on allotted airtime. We provide
VEIL encoding services for a number of our motion picture studio clients to
enable them to customize their promotional material. We also provide ICE
encoding services which enable us to place codes within the audio portion of
a
video, thereby enhancing the overall quality of the encoded video.

Audio
Post-Production.
We
digitally edit and create sound effects, assist in replacing dialog and
re-record audio elements for integration with film and video elements. We design
sound effects to give life to the visual images with a library of sound effects.
Dialog replacement is sometimes required to improve quality, replace lost dialog
or eliminate extraneous noise from the original recording. Re-recording combines
sound effects, dialog, music and laughter or applause to complete the final
product. In addition, the re-recording process allows the enhancement of the
listening experience by adding specialized sound treatments, such as stereo,
Dolby Digital®, SDDS®, THX® and Surround Sound®.

Audio
Layback.
Audio
layback is the process of creating duplicate videotape masters with sound tracks
that are different from the original recorded master sound track. Content owners
selling their assets in foreign markets require the replacement of dialog with
voices speaking local languages. In some cases, all of the audio elements,
including dialog, sound effects, music and laughs, must be recreated, remixed
and synchronized with the original videotape. Audio sources are premixed foreign
language tracks or tracks that contain music and effects only. The latter is
used to make a final videotape product that will be sent to a foreign country
to
permit addition of a foreign dialogue track to the existing music and effects
track.

Visual
Effects.
We
provide visual effects for feature films, television programs and commercial
advertising content. Content creation across all media is in continual need
of
highly realistic, imaginative and intriguing visual effects. Due to the lower
costs of digital content as compared to the cost of live production, more
heightened “realism” has been made possible by today’s highly skilled artists
using sophisticated software. This offers producers of films, TV programs and
commercials more production flexibility and time savings.

Foreign
Language Mastering.
Programming designed for distribution in markets other than those for which
it
was originally produced is prepared for export through language translation
and
either subtitling or voice dubbing. We provide dubbed language versioning with
an audio layback and conform service that supports various audio and videotape
formats to create an international language-specific master videotape. We also
create music and effects tracks from programming shot before an audience to
prepare television sitcoms for dialog recording and international
distribution.

Syndication.
We offer
a broad range of technical services to domestic and international programmers.
We service the basic and premium cable, broadcast syndication and direct-to-home
market segments by providing the facilities and services necessary to assemble
and distribute programming via satellite to viewers in the United States, Canada
and Europe. We provide facilities and services for the delivery of syndicated
television programming in the United States and Canada. Our customer base
consists of the major studios and independent distributors offering network
programming, world-wide independent content owners offering niche market
programming, and pay-per-view services marketing movies and special events
to
the cable industry and direct-to-home viewers.

5

Archival
Services.
We
currently store approximately one million videotape and film elements in a
protected environment. The storage and handling of videotape and film elements
require specialized security and environmental control procedures. We perform
secure management archival services in all of our operating facilities as well
as our state-of-the-art Media Center in Los Angeles. We offer on-line access
to
archival information for advertising clients, and may offer this service to
other clients in the future.

New
Markets

We
believe that the development of value-added services will provide us with the
opportunity to enter or increase our presence in several new or expanding
markets.

International.
Point.360 currently provides electronic and physical duplication and
distribution services for rich media content providers. Furthermore, we believe
that available electronic distribution methods will facilitate further expansion
into the international distribution arena as such technologies become
standardized and cost-effective. In addition, we believe that the growth in
the
distribution of domestic content into international markets will create
increased demand for value-added services currently provided by us such as
standards conversion and audio and digital mastering.

High
Definition Television (“HDTV”).
We are
capitalizing on opportunities created by emerging industry trends such as the
emergence of digital television and its more advanced variant, high-definition
television. HDTV has quickly become the mastering standard for domestic content
providers. We believe that the aggressive timetable associated with such
conversion, which has resulted both from mandates by the Federal Communications
Commission for digital television and high-definition television as well as
competitive forces in the marketplace, is likely to accelerate the rate of
increase in the demand for these services. We maintain a state-of-the-art HDTV
capability.

DVD
Authoring.
We
believe that there are significant opportunities in the DVD authoring market.
With the increasing rate of conversion of existing analog libraries, as well
as
new content being mastered to digital formats, we believe that Point.360 has
positioned itself well to provide value-added services to new and existing
clients. We have made capital investments to expand and upgrade our current
DVD
and digital compression operations in anticipation of the increasing demand
for
DVD and video encoding services.

Sales
and Marketing

We
market
our services through a combination of industry referrals, formal advertising,
trade show participation, special client events, and our Internet website.
While
we rely primarily on our reputation and business contacts within the industry
for the marketing of our services, we also maintain a direct sales force to
communicate the capabilities and competitive advantages of our services to
potential new customers. Our marketing programs are directed toward
communicating our unique capabilities and establishing us as the predominant
value-added partner for entertainment, advertising and corporate
customers.

In
addition to our traditional sales efforts directed at those individuals
responsible for placing orders with our facilities, we also strive to negotiate
“preferred vendor” relationships with our major customers. Through this process,
we negotiate discounted rates with large volume clients in return for being
promoted within the client’s organization as an established and accepted vendor.
This selection process tends to favor larger service providers such as Point.360
that (1) offer lower prices through scale economies, (2) have the capacity
to
handle large orders without outsourcing to other vendors, and (3) can offer
a
strategic partnership on technological and other industry-specific issues.
We
negotiate such agreements periodically with major entertainment studios and
national broadcast networks.

Customers

Point.360
has added customers through acquisitions and by delivering a favorable mix
of
reliability, timeliness, quality and price. The integration of our facilities
has given our customers a time advantage in the ability to deliver broadcast
quality material. We market our services to major and independent motion picture
and television production companies, television program suppliers and, on a
more
limited basis, national television networks, infomercial providers, local
television stations, television program syndicators, corporations and
educational institutions. Our motion picture clients include Disney, Sony
Pictures Entertainment, Twentieth Century Fox, NBC Universal, Warner Bros.,
Metro-Goldwyn-Mayer and Paramount Pictures.

We
solicit the motion picture and television industries to generate revenues.
In
the fiscal year ended December 31, 2006, the six months ended June 30, 2007
and
the fiscal year ended June 30, 2008, five major motion picture studios accounted
for approximately 58%, 56% and 52% of Point.360’s revenues, respectively, while
sales to Twentieth Century Fox and affiliates comprised 33%, 34% and 26% of
revenues in those periods, respectively. Sales to Twentieth Century Fox and
affiliates were made to approximately 50 individual customers within the
group.

6

We
generally do not have exclusive service agreements with our clients. Because
clients generally do not make arrangements with us until shortly before our
facilities and services are required, we usually do not have any significant
backlog of service orders. Our services are generally offered on an hourly
or
per unit basis based on volume.

Customer
Service

We
believe we have built a strong reputation in the market with a commitment to
customer service. We receive customer orders via courier services, telephone,
telecopier and the Internet. The sales and customer service staff develops
strong relationships with clients within the studios and is trained to emphasize
our ability to confirm delivery, meet difficult delivery time frames and provide
reliable and cost-effective service. Several studios are customers because
of
our ability to meet often changing or rush delivery schedules.

We
have a
sales and customer service staff of approximately 39 people, and we provide
services 24 hours per day. This staff serves as a single point of problem
resolution and supports not only our customers but also the television stations
and cable systems to which we deliver.

Competition

The
manipulation, duplication and distribution of rich media assets is a highly
competitive service-oriented business. Certain competitors (both independent
companies and divisions of large companies) provide all or most of the services
provided by us, while others specialize in one or several of these services.
Substantially all of our competitors have a presence in the Los Angeles area,
which is currently the largest market for our services. Due to the current
and
anticipated future demand for video and distribution services in the Los Angeles
area, we believe that both existing and new competitors may expand or establish
video service facilities in this area.

Employees

The
Company had 304 full-time employees as of June 30, 2008. The Company’s employees
are not represented by any collective bargaining organization, and the Company
has never experienced a work stoppage. The Company believes that its relations
with its employees are good.

ITEM
1A. RISK FACTORS

You
should carefully consider each of the following risk factors and all of the
other information set forth in this Form 10-K. The risk factors have been
separated into three groups: (1) risks relating to our business,
(2) risks relating to the separation of New 360 from Point.360, and
(3) risks relating to our common stock. Based on the information currently
known to us, we believe that the following information identifies the most
significant risk factors affecting our company in each of these categories
of
risks. Past financial performance may not be a reliable indicator of future
performance, and historical trends should not be used to anticipate results
or
trends in future periods.

If
any of the following risks and uncertainties develops into actual events, these
events could have a material adverse effect on our business, financial condition
or results of operations. In such case, the trading price of our common stock
could decline.

Risks
Relating to Point.360’s Business

We
have a history of losses, and we may incur losses in the
future.

Point.360
had losses in the fiscal years ended June 30, 2007 and 2008 and in each of
the
four fiscal years ended December 31, 2006 due, in part, to increased price
competition, the cost of being a publicly traded company and a number of unusual
charges. There is no assurance as to future profitability on a quarterly or
annual basis.

Old
Point.360 previously breached its credit agreements, and we may do so in the
future.

Due
to
lower operating cash amounts resulting from reduced sales levels in prior years
and the consequential net losses, Old Point.360 breached certain covenants
of
its credit facility. The breaches were temporarily cured based on amendments
and
forbearance agreements among Old Point.360 and the banks which called for,
among
other provisions, scheduled payments to reduce amounts owed to the banks to
the
permitted borrowing base.

7

Although
we were in a cash positive position as of June 30, 2008 and expect to be for
the
foreseeable future, if we continue to incur losses in the future as a separate
company, there is a risk that we will default under financial covenants
contained in any new credit agreements and/or will not be able to pay off
revolving or term loans when due. If a default condition exists in future
banking arrangements, all amounts that may be outstanding under the new
agreements will be due and payable which could materially and adversely affect
our business.

We
may be unable to compete effectively in a highly competitive
marketplace.

The
post-production industry is a highly competitive, service-oriented business.
In
general, we do not have long-term or exclusive service agreements with our
customers. Business is acquired on a purchase order basis and is based primarily
on customer satisfaction with reliability, timeliness, quality and
price.

We
compete with a variety of post-production firms some of which have a national
presence and, to a lesser extent, the in-house post-production operations of
our
major motion picture studio customers. Some of these firms, and all of the
studios, have greater financial marketing resources and have achieved a higher
level of brand recognition than we have. In the future, we may not be able
to
compete effectively against these competitors merely on the basis of
reliability, timeliness, quality and price or otherwise.

We
may
also face competition from companies in related markets that could offer similar
or superior services to those offered by us. We believe that an increasingly
competitive environment as evidenced by recent price pressure and some related
loss of work and the possibility that customers may utilize in-house
capabilities to a greater extent could lead to a loss of market share or
additional price reductions, which could have a material adverse effect on
our
financial condition, results of operations and prospects.

We
would be adversely affected by the loss of key customers.

Although
we have an active client list of approximately 1,900 customers, five motion
picture studios and and/or their affiliates accounted for approximately 52%,
58%, 56% and 52% of our revenues in calendar years 2005 and 2006, and the fiscal
years ended June 30, 2007 and 2008, respectively. Twentieth Century Fox (and
affiliates) was the only customer which accounted for more than 10% of sales
in
any of the periods, or 26% and 33% in calendar years 2005 and 2006, and 34%
and
26% in the fiscal years ended June 30, 2007 and 2008, respectively. If one
or
more of these companies were to stop using our services, our business could
be
adversely affected. Because we derive substantially all of our revenue from
clients in the entertainment industry, our financial condition, results of
operations and prospects could also be adversely affected by an adverse change
in conditions which impact those industries.

Our
expansion strategy may fail.

Our
growth strategy involves both internal development and expansion through
acquisitions. We currently have no agreements or commitments to acquire any
company or business. Even though Point.360 completed a number of acquisitions
in
the past, the most recent of which was in March 2007, we cannot be sure
additional acceptable acquisitions will be available or that we will be able
to
reach mutually agreeable terms to purchase acquisition targets, or that we
will
be able to profitably manage additional businesses or successfully integrate
such additional businesses without substantial costs, delays or other
problems.

Acquisitions
may involve a number of special risks including: adverse effects on our reported
operating results (including the amortization of acquired intangible assets),
diversion of management’s attention and unanticipated problems or legal
liabilities. In addition, we may require additional funding to finance future
acquisitions. We cannot be sure that we will be able to secure acquisition
financing on acceptable terms or at all. We may also use working capital or
equity, or raise financing through equity offerings or the incurrence of debt,
in connection with the funding of any acquisition. Some or all of these risks
could negatively affect our financial condition, results of operations and
prospects or could result in dilution to our shareholders. In addition, to
the
extent that consolidation becomes more prevalent in the industry, the prices
for
attractive acquisition candidates could increase substantially. We may not
be
able to effect any such transactions. Additionally, if we are able to complete
such transactions they may prove to be unprofitable.

The
geographic expansion of our customers may result in increased demand for
services in certain regions where we currently do not have post-production
facilities. To meet this demand, we may subcontract. However, we have not
entered into any formal negotiations or definitive agreements for this purpose.
Furthermore, we cannot assure you that we will be able to effect such
transactions or that any such transactions will prove to be
profitable.

8

If
we
acquire any entities, we may have to finance a large portion of the anticipated
purchase price and/or refinance then existing credit agreements. The cost of
any
new financing may be higher than our then-existing credit facilities. Future
earnings and cash flow may be negatively impacted if any acquired entity does
not generate sufficient earnings and cash flow to offset the increased
costs.

We
are operating in a changing environment that may adversely affect our
business.

In
prior
years, we experienced industry consolidation, changing technologies and
increased regulation, all of which resulted in new and increased
responsibilities for management personnel and placed, and continues to place,
increased demands on our management, operational and financial systems and
resources. To accommodate these circumstances, compete effectively and manage
future growth, we will be required to continue to implement and improve our
operational, financial and management information systems, and to expand, train,
motivate and manage our work force. We cannot be sure that our personnel,
systems, procedures and controls will be adequate to support our future
operations. Any failure to do so could have a material adverse effect on our
financial condition, results of operations and prospects.

We
may be unable to adapt our business to changing technological
requirements.

Although
we intend to utilize the most efficient and cost-effective technologies
available for telecine, high definition formatting, editing, coloration and
delivery of audio and video content as they develop, we cannot be sure that
we
will be able to adapt to such standards in a timely fashion or at all. We
believe our future growth will depend in part on our ability to add to these
services and to add customers in a timely and cost-effective manner. We cannot
be sure we will be successful in offering such services to existing customers
or
in obtaining new customers for these services. We intend to rely on third-party
vendors for the development of these technologies, and there is no assurance
that such vendors will be able to develop such technologies in a manner that
meets our needs and the needs of our customers.

The
loss of key personnel would adversely affect our business.

We
are
dependent on the efforts and abilities of certain senior management,
particularly those of Haig S. Bagerdjian, Chairman, President and Chief
Executive Officer. The loss or interruption of the services of key members
of
management could have a material adverse effect on our financial condition,
results of operations and prospects if a suitable replacement is not promptly
obtained. Mr. Bagerdjian beneficially owns approximately 29% of Point.360’s
outstanding stock. Although we have severance agreements with Mr. Bagerdjian
and
certain key executives, we cannot be sure that either Mr. Bagerdjian or other
executives will remain with Point.360. In addition, our success depends to
a
significant degree upon the continuing contributions of, and on our ability
to
attract and retain, qualified management, sales, operations, marketing and
technical personnel. The competition for qualified personnel is intense and
the
loss of any such persons, as well as the failure to recruit additional key
personnel in a timely manner, could have a material adverse effect on our
financial condition, results of operations and prospects. There is no assurance
that we will be able to continue to attract and retain qualified management
and
other personnel for the development of our business.

We
may be unable to meet the demands of our customers.

Our
business is dependent on our ability to meet the current and future demands
of
our customers, which demands include reliability, timeliness, quality and price.
Any failure to do so, whether or not caused by factors within our control could
result in losses to such clients. Although we disclaim any liability for such
losses, there is no assurance that claims would not be asserted and dissatisfied
customers may refuse to place further orders with the Company in the event
of a
significant occurrence of lost elements, either of which could have a material
adverse effect on our financial condition, results of operations and prospects.
Although we maintain insurance against business interruption, such insurance
may
not be adequate to protect us from significant loss in these circumstances
and
there is no assurance that a major catastrophe (such as an earthquake or other
natural disaster) would not result in a prolonged interruption of our business.
In addition, our ability to deliver services within the time periods requested
by customers depends on a number of factors, some of which are outside of our
control, including equipment failure, work stoppages by package delivery vendors
or interruption in services by telephone, internet or satellite service
providers.

Our
quarterly operating results have fluctuated significantly in the past and may
fluctuate in the future.

Our
operating results have varied in the past, and may vary in the future, depending
on factors such as sales volume fluctuations due to seasonal buying patterns,
the timing of new product and service introductions, the timing of revenue
recognition upon the completion of longer term projects, increased competition,
timing of acquisitions, general economic factors and other factors. As a result,
we believe that period-to-period comparisons of our results of operations are
not necessarily meaningful and should not be relied upon as an indication of
future performance. Our operating results have historically been significantly
influenced by the volume of business from the motion picture industry, which
is
an industry that is subject to seasonal and cyclical downturns, and,
occasionally, work stoppages by actors, writers and others. For example, the
12,000-member Writer’s Guild of America began a strike on November 5, 2007 which
affected portions of our business. In any period our revenues are subject to
variation based on changes in the volume and mix of services performed during
the period. It is possible that in a future quarter our operating results will
be below the expectations of equity research analysts and investors. In such
event, the price of our common stock would likely be materially adversely
affected.

9

Risks
Relating to the Separation of the Company from Old
Point.360

We
may be unable to achieve some or all of the benefits that we expect to achieve
from our separation from Old Point.360.

As
a
stand-alone, independent public company, we believe that our business will
benefit from, among other things, allowing our management to design and
implement corporate policies and strategies that are based primarily on the
characteristics of our business, allowing us to focus our financial resources
wholly on our own operations and implement and maintain a capital structure
designed to meet our own specific needs. However, by separating from Old
Point.360, there is a risk that we may be more susceptible to market
fluctuations and other adverse events than we would have been were we still
a
part of Old Point.360. As part of Old Point.360, we were able to enjoy certain
benefits from Old Point.360’s operating diversity, purchasing and borrowing
leverage; available capital for investments and opportunities to pursue
integrated strategies with Old Point.360’s other businesses. As such, we may not
be able to achieve some or all of the benefits that we expect to achieve as
a
stand alone, independent post-production company.

We
have no operating history as a separate public company, and our historical
and
pro forma financial information is not necessarily representative of the results
we would have achieved as a separate publicly traded company, and may not be
a
reliable indicator of our future results.

The
historical and pro forma financial information included in this Form 10-K does
not necessarily reflect the financial condition, results of operations or cash
flows that we would have achieved as a separate publicly traded company during
the periods presented or those that we will achieve in the future primarily
as a
result of the following factors:

·

Prior
to our August 14, 2007 separation from Old Point.360, our business
has
been operated by Old Point.360 as part of its broader corporate
organization, rather than as an independent company. Old Point.360
performed various corporate functions for the post-production business,
including, but not limited to, tax administration, certain governance
functions (including compliance with the Sarbanes-Oxley Act of 2002)
and
external reporting. Our historical and pro forma financial results
reflect
allocations of corporate expenses from Old Point.360 for these and
similar
functions based on the relationship of our sales to sales of Old
Point.360
for certain administrative functions necessary to complete the sales
cycle
(sales, personnel, billing, accounting, etc.), specific balance sheet
accounts comprising long-lived assets (term loan interest expense)
and net
working capital (revolving loan interest expense), and other measurements.
We believe that these allocations are comparable to the expenses
we would
have incurred had we operated as a separate publicly traded company,
although there is a risk that we may incur higher expenses as an
independent company.

·

Prior
to our separation from Old Point.360, our business has been integrated
with the other businesses of Point.360. Historically, we have shared
economies of scope and scale in costs, employees, vendor relationships
and
customer relationships. The loss of these benefits could have an
adverse
effect on our business, results of operations and financial condition
following the completion of the
separation.

·

Generally,
our working capital requirements and capital for our general corporate
purposes, including acquisitions and capital expenditures, have
historically been satisfied as part of the corporate-wide cash management
policies of Old Point.360. Without the opportunity to obtain financing
from Old Point.360, we may need to obtain additional financing from
banks,
through public offerings or private placements of debt or equity
securities, strategic relationships or other
arrangements.

·

Subsequent
to the completion of our separation from Old Point.360, the cost
of
capital for our business may be higher than Old Point.360’s cost of
capital prior to our separation because Old Point.360 operating results
were higher than what ours are contemplated to be following the
separation.

10

·

Other
significant changes may occur in our cost structure, management,
financing
and business operations as a result of our operating as a company
separate
from Old Point.360.

We
may be unable to make, on a timely or cost-effective basis, the changes
necessary to operate as an independent company, and we may experience increased
costs after our separation from Old Point.360 or as a result of the
separation.

Following
the completion of our separation from Old Point.360, the costs of being a public
entity will be spread over a lower revenue base, which may negatively affect
operating results.

We
will be responsible for paying certain liabilities incurred by Old Point.360
prior to the date of our separation from Old Point.360.

Pursuant
to agreements between us and DG FastChannel, Inc. (“DG”), we assumed
responsibility for the payment of various liabilities that were incurred by
Old
Point.360 prior to the date of our separation from Old Point.360, including
accounts payable and other expenses not exclusively related to Old Point.360’s
ads business, taxes for periods prior to the separation date and other
liabilities of Old Point.360, including contingent liabilities whose amount
is
not yet known, arising out of the operation of Old Point.360’s business (other
than the ads business) during the period prior to the separation. Although
we do
not currently have any knowledge that the IRS, other governmental agencies
or
third parties intend to file lawsuits or initiate proceedings with respect
to
the operation of Old Point.360’s business prior to the separation date, that
possibility exists and the payment by us of any such contingent liabilities
for
which we are responsible could materially and adversely affect our financial
condition.

Risks
Relating to the Company’s Common Stock

A
trading market that will provide adequate liquidity for our common stock may
not
develop. In addition, the market price of our shares may fluctuate
widely.

Our
common stock began public trading on August 14, 2007. There is no assurance
that
an active trading market will be sustained in the future.

We
cannot
predict the prices at which our common stock may trade. The market price of
our
common stock may fluctuate widely, depending upon many factors, some of which
may be beyond our control, including:

·

our
business profile and market capitalization may not fit the investment
objectives of our shareholders and, as a result, our shareholders
may sell
our shares after the distribution;

·

a
shift in our investor base;

·

our
quarterly or annual earnings, or those of other companies in our
industry;

·

actual
or anticipated fluctuations in our operating results due to the
seasonality of our business and other factors related to our
business;

announcements
by us or our competitors of significant acquisitions or
dispositions;

·

our
ability to meet earnings estimates of
shareholders;

·

the
operating and stock price performance of other comparable
companies;

·

overall
market fluctuations; and

·

general
economic conditions.

11

Stock
markets in general have experienced volatility that has often been unrelated
to
the operating performance of a particular company. These broad market
fluctuations may adversely affect the trading price of our common stock.

Investors
may be unable to accurately value our common stock.

Investors
often value companies based on the stock prices and results of operations of
other comparable companies. Currently, no public post-production company exists
that is directly comparable to our size, scale and service offerings. As such,
investors may find it difficult to accurately value our common stock, which
may
cause our common stock price to trade below our true value.

Your
percentage ownership in the Company may be diluted in the
future.

Your
percentage ownership in the Company may be diluted in the future because of
equity awards that have been or may be granted to our directors, officers and
employees. We have adopted the 2007 Equity Incentive Plan, which provides for
the grant of equity based awards, including restricted stock, restricted stock
units, stock options, stock appreciation rights and other equity-based awards
to
our directors, officers and other employees, advisors and consultants.

Our
shareholder rights agreement and ability to issue preferred stock may
discourage, delay or prevent a change in control of the Company that would
benefit our shareholders.

Our
Board
of Directors has the authority to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions thereof, including voting rights, without any further vote or
action by the Company’s shareholders. Although
we have no current plans to issue any other shares of preferred stock, the
rights of the holders of common stock would be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. Issuance of preferred stock could have the effect of
discouraging, delaying, or preventing a change in control of the Company that
would be beneficial to our shareholders.

On
the
date that the Company’s shares were distributed to Old Point.360 shareholders,
each shareholder also received one preferred share purchase right for each
share
of our common stock received by the shareholder. The rights will be attached
to
the common stock and will trade separately and be exercisable only in the event
that a person or group acquires or announces the intent to acquire 20% or more
of our common stock. Each right will entitle shareholders to buy one
one-hundredth of a share of a new series of junior participating preferred
stock
at an exercise price of $10. If we are acquired in a merger or other business
combination transaction after a person has acquired 20% or more of our
outstanding common stock, each right will entitle its holder to purchase, at
the
right’s then-current exercise price, a number of the acquiring company’s common
shares having a market value of twice such price. In addition, if a person
or
group acquires 20% or more of our outstanding common stock, each right will
entitle its holder (other than such person or members of such group) to
purchase, at the right’s then-current exercise price, a number of Point.360
common shares having a market value of twice such price. Before a person or
group acquires beneficial ownership of 20% or more of our common stock, the
rights are redeemable for $.0001 per right at the option of the Board of
Directors.

Although
our shareholder rights agreement is intended to encourage anyone seeking to
acquire the Company to negotiate with the Board prior to attempting a takeover,
the rights agreement may have
the
effect of discouraging, delaying or preventing a change in control of the
Company that would be beneficial to our shareholders.

We
do not expect to pay dividends.

We
do not
believe that we will have the financial strength to pay dividends for the
foreseeable future. If we do not pay dividends, the price of our common stock
that you receive in the distribution must appreciate for you to receive a gain
on your investment in the Company. This appreciation may not occur.

Our
controlling shareholders may cause the Company to be operated in a manner that
is not in the best interests of other shareholders.

Our
Chairman, President and Chief Executive Officer, Haig S. Bagerdjian,
beneficially owns approximately 29% of our common stock. The ex-spouse of R.
Luke Stefanko, Old Point.360’s former President and Chief Executive Officer,
owns approximately 12% of the common stock. By virtue of their stock ownership,
Ms. Stefanko and Mr. Bagerdjian individually or together may be able to
significantly influence the outcome of matters required to be submitted to
a
vote of shareholders, including (1) the election of the Board of Directors,
(2)
amendments to our Articles of Incorporation and (3) approval of mergers and
other significant corporate transactions. The foregoing may have the effect
of
discouraging, delaying or preventing certain types of transactions involving
an
actual or potential change of control of the Company, including transactions
in
which the holders of common stock might otherwise receive a premium for their
shares over current market prices.

12

ITEM
1. B. UNRESOLVED STAFF COMMENTS

Not
applicable

ITEM
2. PROPERTIES

The
Company currently owns or leases 6 facilities which all have production
capabilities and/or sales activities. The terms of leases for leased facilities
expire at various dates from 2009 to 2021. The following table sets forth the
location and approximate square footage of the Company's properties:

Square

Footage

Hollywood,
CA (leased)

32,000

Hollywood,
CA (leased)

8,000

Burbank,
CA (owned)

32,000

Burbank,
CA (leased)

45,500

Los
Angeles, CA (leased)

64,600

Los
Angeles, CA (leased)

13,400

ITEM
3. LEGAL PROCEEDINGS

In
July
2008, the Company was served with a complaint filed in the Superior Court of
the
State of California for the County of Los Angeles by Aryana Farshad and Aryana
F. Productions, Inc. (“Farshad”). The complaint alleges that Point.360 and its
janitorial cleaning company failed to exercise reasonable care for the
protection and preservation of Farshad’s film footage which was lost. As a
result of the defendant’s negligence, Farshad claims to have suffered damages in
excess of $2 million and additional unquantified general and special damages.
While the outcome of this claim cannot be predicted with certainty, management
does not believe that the outcome will have a material effect on the financial
condition or results of operation of the Company.

Fromtime
to
time, the Company may become a party to other legal actions and complaints
arising in the ordinary course of business, although it is not currently
involved in any such material legal proceedings.

ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No
matters were submitted to the Company’s shareholders for a vote during the
period covered by this report.

13

PART
II

ITEM 5.

MARKET
FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER
PURCHASES OF EQUITY
SECURITIES

Market
Information

The
Company's Common Stock is traded on the NASDAQ Global Market under the symbol
PTSX. The following table sets forth, for the periods since the separation
on
August 14, 2007 from Old Point.360, the high and low closing price per share
for
the Common Stock.

Common Stock

Low

High

Year
Ended June 30, 2008

First
Quarter

$

2.00

$

2.59

Second
Quarter

$

1.80

$

2.24

Third
Quarter

$

1.25

$

2.01

Fourth
Quarter

$

1.50

$

1.75

On
August
31, 2008, the closing sale price of the Common Stock as reported on the NASDAQ
Global Market $1.39 per share. On that date, there were approximately 1,000
holders of record of the Common Stock.

Dividends

Neither
the Company nor Old Point.360 have paid dividends on its Common Stock. The
Company’s ability to pay dividends depends upon limitations under applicable law
and covenants under its bank agreements. The Company currently does not intend
to pay any dividends on its Common Stock in the foreseeable future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources."

Stock
Repurchases

The
Company did not repurchase any shares of its Common Stock during the fiscal
year
ended June 30, 2008.

14

ITEM
6. SELECTED FINANCIAL DATA

The
following data, insofar as they relate to each of the calendar years 2003 to
2006, and the fiscal years ended June 30, 2007 and 2008 have been derived from
the Company’s annual financial statements. This information should be read in
conjunction with the Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. All amounts are shown in thousands, except per share
data.

The
amounts of Invested Equity in Selected Balance Sheet Data below as of December
31, 2003, 2004, 2005 and 2006, and as of June 30, 2007 have been restated to
reflect the matters described in the “Explanatory Note” immediately preceding
Part I, Item 1 and in Notes 13 and 14 to our consolidated financial statements
included elsewhere in this report.

Six Months Ended

June 30,

Year Ended

June 30,

Statement of Income (Loss) Data

2003

2004

2005

2006

2006

2007

2007

2008

(unaudited)

(unaudited)

(unaudited)

Revenues

$

37,542

$

38,588

$

43,059

$

43,533

$

21,692

$

20,850

$

42,691

$

45,150

Cost
of services sold

(25,774

)

(27,958

)

(29,472

)

(29,976

)

(14,948

)

(15,760

)

(30,788

)

(31,156

)

Gross
profit

11,769

10,631

13,587

13,557

6,744

5,090

11,903

13,994

Selling,
general and administrative expense

(11,627

)

(13,649

)

(14,972

)

(13,554

)

(6,995

)

(7,071

)

(13,631

)

(15,124

)

Operating
income (loss)

142

(3,018

)

(1,385

)

3

(251

)

(1,981

)

(1,728

)

(1,130

)

Interest
expense, net

(1,644

)

(654

)

(1,280

)

(659

)

(448

)

(263

)

(473

)

(205

)

Other
income

-

-

-

-

-

-

-

100

Benefit
from income tax

604

1,489

1,045

342

280

607

668

292

Net
income (loss)

$

(899

)

$

(2,183

)

$

(1,620

)

$

(314

)

$

(419

)

$

(1,637

)

$

(1,533

)

$

(
943

)

Pro
forma earnings (loss) per share

$

(0.03

)

$

(0.04

)

$

(0.16

)

$

(0.15

)

$

(0.09

)

Pro
forma weighted average common share outstanding

10,554

10,554

10,554

10,554

10,554

15

Year Ended December 31,

Year Ended June 30,

Other Data

2003

2004

2005

2006

2007

2008

(unaudited)

(unaudited)

(unaudited)

Capital
expenditures

$

1,981

$

4,014

$

2
,317

$

2,064

$

839

$

2,037

Selected
Balance Sheet Data

Cash
and cash equivalents

$

8,006

$

668

$

595

$

—

$

7,302

$

13,056

Working
capital (deficit)

4,170

1,565

(234

)

1,325

9,814

16,497

Property
and equipment, net

13,431

29,437

26,474

12,850

(1)

11,330

8,667

Total
assets

37,935

49,108

47,229

33,482

(1)

38,103

42,358

Due
to parent company

13,683

17,126

17,416

5,690

(1)

5,871

-

Invested
or Shareholders’ Equity

18,002

(2)

20,541

(2)

19,757

(2)

17,424

(2)

24,035

(2)

30,800

(1)

On
March 29, 2006, Old Point.360 sold and leased back its Media Center
facility. Proceeds were used to repay debt. See Notes 4 and 5 of
the notes
to consolidated financial statements included elsewhere
herein.

(2)

Represents
Old Point.360’s invested equity in the Company restated as
follows:

Year Ended December 31,

Year Ended June 30,

2003

2004

2005

2006

2007

(unaudited)

(unaudited)

(unaudited)

Invested
Equity as originally reported

$

14,554

$

17,093

$

16,309

$

13,976

$

20,587

Correction

3,448

3,448

3,448

3,448

3,448

As
restated

$

18,002

$

20,541

$

19,757

$

17,424

$

24,035

In
presenting the financial data above in conformity with general accepted
accounting principles, we are required to make estimates and assumptions that
affect the amounts reported. See “Critical Accounting Policies” included
elsewhere herein for a detailed discussion of the accounting policies that
we
believe require subjective and complex judgments that could potentially affect
reported results.

Between
January 1, 2003 and June 30, 2007, Old Point.360 completed a number of
acquisitions, the results of operations and financial position of which have
been included from their acquisition dates forward. See Note 3 to our
consolidated financial statements for a discussion of the acquisitions for
the
annual periods ended 2004, 2005 and 2006 and the first six months of 2007,
respectively.

ITEM
7.

MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Except
for the historical information contained herein, certain statements in this
annual report are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995, which involve certain risks and
uncertainties, which could cause actual results to differ materially from those
discussed herein, including but not limited to competition, customer and
industry concentration, depending on technological developments, risks related
to expansion, dependence on key personnel, fluctuating results and seasonality
and control by management. See the relevant portions of the Company's documents
filed with the Securities and Exchange Commission and Risk Factors in Item
1A of
this Form 10-K, for a further discussion of these and other risks and
uncertainties applicable to the Company's business.

16

Overview

We
are
one of the largest providers of video and film asset management services to
owners, producers and distributors of entertainment content. We provide the
services necessary to edit, master, reformat and archive our clients’ film and
video content, including television programming, feature films and movie
trailers using electronic and physical means. Clients include major motion
picture studios and independent producers.

We
operate in a highly competitive environment in which customers desire a broad
range of service at a reasonable price. There are many competitors offering
some
or all of the services provided by us. Additionally, some of our customers
are
large studios, which also have in-house capabilities that may influence the
amount of work outsourced to companies like us. We attract and retain customers
by maintaining a high service level at reasonable prices.

We
have
an opportunity to expand our business by establishing closer relationships
with
our customers through excellent service at a competitive price and expanding
our
service offering. Our success is also dependent on attracting and maintaining
employees capable of maintaining such relationships. Also, growth can be
achieved by acquiring similar businesses (for example, the acquisition of IVC
in
July 2004) that can increase revenues by adding new customers, or expanding
services provided to existing customers.

Our
business generally involves the immediate servicing needs of our customers.
Most
orders are fulfilled within several days, with occasional larger orders spanning
weeks or months. At any particular time, we have little firm
backlog.

We
believe that our interconnected facilities provide the ability to better service
customers than single-location competitors. We will look to expand both our
service offering and geographical presence through acquisition of other
businesses or opening additional facilities.

In
conjunction with the merger of Old Point.360 into DG FastChannel, we changed
our
fiscal year end from December 31 to June 30, a date closer to the transaction.
The following table sets forth the amount and percentage relationship to
revenues of certain items included within our consolidated statement of income
(loss) for the twelve month periods ended June 30, 2007 (unaudited) and June
30,
2008. The commentary below is based on these financial statements (in
thousands).

Revenues.
Revenues were $45.2 million for the twelve months ended June 30, 2008, compared
to $42.7 million for the twelve months ended June 30, 2007 (unaudited). The
addition of Eden FX in March 2007 contributed an additional $3.5 million of
revenues in the 2008 period. Excluding the net effect of Eden FX, revenues
declined by $1.0 million or 2.5% from the prior period. We expect revenues
to be
under some downward pressure in the future due to lower prices being offered
by
some studio clients, offset by potential future increases as we continue to
invest in high definition capabilities where demand is expected to grow. We
believe our high definition service platform will attract additional business
in
the future.

17

Gross
Profit.
In
2008, gross margin was 31.0% of sales, compared to 27.9% for the same period
last year. The increase in gross profit percentage is due to the contribution
of
Eden FX as compared to last year and the elimination of a facility (see
“restructuring charge” below). Additionally, headcount was reduced by 37
employees during fiscal 2008, offset by normal wage and facility rent increases.
From time to time, we will increase staff capabilities to satisfy potential
customer demand. If the expected demand does not materialize, we will adjust
personnel levels. We expect gross margins to fluctuate in the future as the
sales mix changes.

Selling,
General and Administrative Expense. SG&A
expense was $14.5 million (32.1% of sales) in the 2008 period as compared to
$13.6 million (31.9% of sales) in 2007. Approximately $0.9 of the increase
was
due to the addition of Eden FX for an entire year.

Restructuring
Costs.
In the
first quarter of 2008, in conjunction with the completion of the Merger and
Spin-off transactions, we decided to close down one of our post production
facilities. Future costs associated with the facility lease and certain
severance payments were treated as restructuring costs.

Allocation
of Point.360 Corporate Expenses.
Corporate expense allocation in the 2008 period was $0.1 million, or 0.3% of
sales, compared to $3.2 million, or 7.6% of sales in 2007. Such amounts are
included in the explanation of SG&A variances above.

Operating
Income (Loss). Operating
loss was $1.1 million in 2008 compared to a loss of $1.7 million in 2007.

Interest
Expense, Net. Interest
expense, net for 2008 was $0.1 million, a decrease of $0.4 million from 2007.
The decrease was due to lower debt levels and payment of revolving credit debt
with the proceeds of employee stock option exercises, offset partially by higher
rates on remaining variable interest debt. Interest income in 2008 was $0.3
million, an increase of $0.3 million from 2007 due to higher cash
balances.

Net
Loss. Net
loss
for 2008 was $0.9 million compared to $1.5 million in 2007.

The
following table sets forth the amount and percentage relationship to revenues
of
certain items included within Point.360’s consolidated statement of income
(loss) for the six months ended June 30, 2006 and 2007. The commentary below
is
based on these financial statements (in thousands).

Six Months Ended June 30,

2006

2007

Amount

Percent of

Revenues

Amount

Percent of

Revenues

(unaudited)

Revenues

$

21,642

100.0

$

20,850

100.0

Costs
of services sold

(14,948

)

(68.9

)

(15,760

)

(75.6

)

Gross
profit

6,744

31.1

5,090

24.4

Selling,
general and administrative expense

(5,303

)

(24.4

)

(5,590

)

(26.8

)

Allocation
of Old Point.360 corporate expenses

(1,692

)

(7.8

)

(1,481

)

(7.1

)

Operating
income (loss)

(251

)

(1.2

)

(1,981

)

(9.5

)

Interest
expense, net

(448

)

(2.0

)

(263

)

(1.2

)

Benefit
from income taxes

280

1.3

607

3.8

Net
income (loss)

$

(419

)

(1.9

)

$

(1,637

)

(7.0

)

Six
Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
(unaudited)

Revenues.
Revenues were $20.9 million for the six months ended June 30, 2007, compared
to
$21.7 million for the six months ended June 30, 2006 (unaudited). The addition
of Eden FX in March 2007 contributed $0.6 million of revenues in the 2007
period. Excluding the effect of Eden FX, revenues declined by $1.4 million
or
6.5% from the prior period due to lower ordering patterns of our major studio
customers.

18

Gross
Profit.
In
2007, gross margin was 24.4% of sales, compared to 31.1% for the same period
last year. The sale/leaseback of our Media Center facility penalized gross
margin by 1% of sales (i.e., lease costs increased $0.2 million in the 2007
period net of depreciation associated with the previously-owned facility).
The
impact of the sale/leaseback will be continuing. The remaining decrease in
gross
profit percentage is due to higher wages and benefits due to the addition of
editors, graphic artists and others associated with Eden FX and to attract
new
business and general salary increases.

Selling,
General and Administrative Expense. SG&A
expense was $5.6 million (26.8% of sales) in the 2007 period as compared to
$5.3
million (24.4% of sales) in 2006. The increase of $0.3 million was due
principally to the addition of Eden FX.

Allocation
of Point.360 Corporate Expenses.
Corporate expense allocation in the 2007 period was $1.5 million, or 7.1% of
sales, compared to $1.7 million, or 7.8% of sales in 2006.

Operating
Income (Loss). Operating
loss was $2.0 million in 2007 compared to a loss of $0.3 million in 2006. The
operating loss associated with Eden FX was $0.5 million as Eden’s business is
seasonally low as it participates largely in the television episodic market.

Interest
Expense, Net. Interest
expense, net for 2007 was $0.3 million, a decrease of $0.1 million from 2006.
The decrease was due to lower debt levels resulting from the sale/leaseback
transaction and payment of revolving credit debt with the proceeds of employee
stock option exercises, offset partially by higher rates on remaining variable
interest debt.

Net
Loss. Net
loss
for 2007 was $1.6 million compared to $0.4 million in 2006.

The
following table sets forth the amount and percentage relationship to revenues
of
certain items included within Point.360’s consolidated statement of income
(loss) for the years ended December 31, 2006 and 2005. The commentary below
is
based on these financial statements (in thousands).

Year Ended

December 31, 2005

December 31, 2006

Amount

Percent of

Revenues

Amount

Percent of

Revenues

Revenues

$

43,059

100.00

$

43,533

100.0

Costs
of services sold

(29,472

)

(68.4

)

(29,976

)

(
68.9

)

Gross
profit

13,587

31.6

13,557

31.1

Selling,
general and administrative expense

(11,201

)

(26.0

)

(10,108

)

(23.2

)

Allocation
of Old Point.360 corporate expenses

(3,771

)

(8.8

)

(3,446

)

(7.9

)

Operating
income (loss)

(1,385

)

(3.2

)

3

-

Interest
expense, net

(1,280

)

(3.0

)

(659

)

(1.5

)

Benefit
from income taxes

1,045

2.4

342

0.7

Net
income (loss)

$

(1,620

)

(3.8

)

$

(314

)

(0.1

)

Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005

Revenues.
Revenues
were $43.5 million for the year ended December 31, 2006, compared to $43.1
million for the year ended December 31, 2005. There were no significant trends
affecting 2006 sales when compared to 2005.

Gross
Profit.
In
2006, gross margin was 31.1% of sales, compared to 31.6% for last year. The
sale/leaseback of our Media Center facility penalized gross margin by 1% of
sales (i.e., lease costs increased $0.6 million in the 2006 period net of
depreciation associated with the previously-owned facility). The impact of
the
sale/leaseback will be continuing. The remaining increase in gross profit
percentage is due to lower wages and benefits.

Selling,
General and Administrative Expense. SG&A
expense was $10.1 million (23% of sales) in 2006 as compared to $11.2 million
(26% of sales) in 2005. The reduction of $1.1 million was due principally to
lower wages and benefits.

19

Allocation
of Old Point.360 Corporate Expenses.
Corporate expense allocation in 2006 was $3.4 million, or 7.9% of sales,
compared to $3.8 million, or 8.8% of sales in 2005. The decline is due
principally to lower Point.360 administrative personnel costs.

Operating
Income (Loss) Operating
income was $3,000 in 2006, compared to a loss of $1.4 million in
2005.

Interest
Expense, Net. Interest
expense, net for 2006 was $0.7 million, a decrease of $0.6 million from 2005.
The decrease was due to lower debt levels resulting from the sale/leaseback
transaction offset partially by higher rates on remaining variable interest
debt.

Net
Loss. Net
loss
for 2006 was $0.3 million compared to $1.6 million in 2005.

LIQUIDITY
AND CAPITAL RESOURCES

This
discussion should be read in conjunction with the notes to the financial
statements and the corresponding information more fully described elsewhere
in
this Form 10-K.

On
August
14, 2007 and thereafter, the Company received $7 million from DG FastChannel
upon completion of the Merger. The Company also received approximately $2.2
million for reimbursement of merger expenses and prepayment for ADS Business
working capital. The Company expects to receive an additional $0.4 million
from
DG FastChannel for ADS Business working capital.

On
December 30, 2005, Old Point.360 entered a $10 million term loan agreement.
The
term loan provides for interest at LIBOR (2.91% at June 30, 2008) plus 3.15%,
or
6.06% on that date, and is secured by the Company’s equipment. The term loan
will be repaid in 60 equal principal payments plus interest.

On
March
30, 2007, Old Point.360 entered into an additional $2.5 million term loan
agreement. The loan provides for interest at 8.35% per annum and is secured
by
the Company’s equipment. The loan will be repaid in 45 equal monthly
installments of principal and interest. Both the December 2005 and March 2007
term loans were assumed by the Company in the Spin-off.

In
August
2007, the Company entered into a new credit agreement which provides up to
$8
million of revolving credit based on 80% of acceptable accounts receivables,
as
defined. The two-year agreement provides for interest of either (i) prime (5.00%
at June 30, 2008) minus 0% - 1.00% or (ii) LIBOR plus 1.50% - 2.50% depending
on
the level of the Company’s ratio of outstanding debt to fixed charges (as
defined), or 4.50% or 4.91%, respectively, at June 30, 2008. The facility is
secured by all of the Company’s assets, except for equipment securing term loans
as described above.

In
March
2006, Old Point.360 entered into a sale and leaseback transaction with respect
to its Media Center vaulting real estate. The real estate was sold for
$13,946,000 resulting in a $1.3 million after tax gain. Additionally, Old
Point.360 received $500,000 from the purchaser for improvements. In accordance
with SFAS No.28, “Accounting
for Sales with Leasebacks” (“SFAS28”),
the gain and the improvement allowance will be amortized over the initial
15-year lease term as reduced rent.

The
following table summarizes the June 30, 2008 amounts outstanding under our
revolving line of credit and term loans:

Revolving
credit

$

-

Current
portion of term loan

1,811,000

Long-term
portion of term loan

2,839,000

Total

$

4,650,000

Monthly
and annual principal and interest payments due under the term debt are
approximately $193,000 and $2.3 million, respectively, assuming no change in
interest rates.

In
July
2008, the Company entered into a Promissory Note with a bank (the “Note”) in
order to purchase land and a building that has been occupied by the Company
since 1998. Pursuant to the Note, the Company borrowed $6.0 million payable
in
monthly installments of principal and interest on a fully amortized bases over
30 years. The mortgage debt is secured by the land and building. The resulting
annual mortgage and interest payments on the Note will be approximately $0.2
million less than the annual rent payments on the property at the time of the
transaction.

Cash
generated by operating activities is directly dependent upon sales levels and
gross margins achieved. We generally receive payments from customers in 50-90
days after services are performed. The larger payroll component of cost of
sales
must be paid currently. Payment terms of other liabilities vary by vendor and
type. Income taxes must be paid quarterly. Fluctuations in sales levels will
generally affect cash flow negatively or positively in early periods of growth
or contraction, respectively, because of operating cash receipt/payment timing.
Other investing and financing cash flows also affect cash
availability.

20

The
bank
revolving credit agreement requires us to maintain a minimum “fixed charge
coverage ratio.” Our fixed charge coverage ratio compares, on a rolling
twelve-month basis, EBITDA plus rent expense and non-cash charges less income
tax payments, to (ii) interest expense plus rent expense, the current portion
of
long term debt and maintenance capital expenditures. As of June 30, 2008, the
fixed charge coverage ratio was 1.37 as compared to a minimum requirement of
1.10.

We
expect
that amounts available under the revolving credit arrangement (approximately
$3.8 million at June 30, 2008), the availability of bank or institutional credit
from new sources and cash generated from operations will be sufficient to fund
debt service, operating needs and about $2.0 – $3.0 million of capital
expenditures for the next twelve months.

In
March
2007, we acquired substantially all the assets of Eden FX for approximately
$2.2
million in cash. The purchase agreement requires additional payments of $0.7
million, $0.9 million and $1.2 million in March of 2008, 2009 and 2010,
respectively, if earnings during the three years after acquisition meet certain
predetermined levels. The earnings level for calendar 2007 was not met;
therefore, the 2008 payment was not made. No possible additional payments have
been accrued in the financial statements as of June 30, 2008.

The
following table summarizes contractual obligations as of June 30, 2008 due
in
the future:

Payment due by Period

Contractual Obligations

Total

Less than 1 Year

Years

2 and 3

Years

4 and 5

Thereafter

Long Term Debt Principal
Obligations

$

4,650,000

$

1,811,000

$

2,839,000

$

-

$

-

Long
Term Debt Interest Obligations
(1)

400,000

254,000

146,000

-

-

Operating
Lease Obligations

20,434,000

2,219,000

4,651,000

3,657,000

9,907,000

Total

$

25,483,000

$

4,283,000

$

7,635,000

$

3,657,000

$

9,907,000

(1)

Interest
on variable rate debt has been computed using the rate on the latest
balance sheet date.

The
table
below summarizes contractual obligations as of June 30, 2008 due in the future
including obligations related to a mortgage note for the July 2008 purchase
of
real estate (see Note 14 - Subsequent Events of Notes to Consolidated Financial
Statements elsewhere in this Form 10-K):

Payment due by Period

Contractual Obligations

Total

Less than 1 Year

Years

2 and 3

Years

4 and 5

Thereafter

Long Term Debt Principal Obligations

$

10,649,000

$

1,860,000

$

2,968,000

$

148,000

$

5,673,000

Long
Term Debt Interest Obligations
(1)

8,296,000

612,000

994,000

830,000

5,860,000

Operating
Lease Obligations

20,434,000

2,219,000

4,651,000

3,657,000

9,907,000

Total

$

39,379,000

$

4,691,000

$

8,613,000

$

4,635,000

$

21,440,000

(1)

Interest
on variable rate debt has been computed using the rate on the latest
balance sheet date.

During
the past year, the Company has generated sufficient cash to meet operating,
capital expenditure and debt service needs and obligations, as well as to
provide sufficient cash reserves to address contingencies. When preparing
estimates of future cash flows, we consider historical performance,
technological changes, market factors, industry trends and other criteria.
In
our opinion, the Company will continue to be able to fund its needs for the
foreseeable future.

We
will
continue to consider the acquisition of businesses which compliment our current
operations. Consummation of any such acquisition or other expansion of the
business conducted by the Company may be subject to the Company securing
additional financing, perhaps at a cost higher than our existing term loans.
Future earnings and cash flow may be negatively impacted to the extent that
any
acquired entities do not generate sufficient earnings and cash flow to offset
the increased financing costs.

21

CRITICAL
ACCOUNTING POLICIES AND ESTIMATES

Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates and judgments,
including those related to allowance for doubtful accounts, valuation of
long-lived assets, and accounting for income taxes. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.

Critical
accounting policies are those that are important to the portrayal of the
Company’s financial condition and results, and which require management to make
difficult, subjective and/or complex judgments. Critical accounting policies
cover accounting matters that are inherently uncertain because the future
resolution of such matters is unknown. We have made critical estimates in the
following areas:

Revenues.
We
perform a multitude of services for our clients, including film-to-tape
transfer, video and audio editing, standards conversions, adding special
effects, duplication, distribution, etc. A customer orders one or more of these
services with respect to an element (commercial spot, movie, trailer, electronic
press kit, etc.). The sum total of services performed on a particular element
(a
“package”) becomes the deliverable (i.e., the customer will pay for the services
ordered in total when the entire job is completed). Occasionally, a major studio
will request that package services be performed on multiple elements. Each
element creates a separate revenue stream which is recognized only when all
requested services have been performed on that element.

Allowance
for doubtful accounts. We
are
required to make judgments, based on historical experience and future
expectations, as to the collectibility of accounts receivable. The allowances
for doubtful accounts and sales returns represent allowances for customer trade
accounts receivable that are estimated to be partially or entirely
uncollectible. These allowances are used to reduce gross trade receivables
to
their net realizable value. The Company records these allowances as a charge
to
selling, general and administrative expenses based on estimates related to
the
following factors: i) customer specific allowance; ii) amounts based upon an
aging schedule and iii) an estimated amount, based on the Company’s historical
experience, for issues not yet identified.

Valuation
of long-lived and intangible assets.
Long-lived assets, consisting primarily of property, plant and equipment and
intangibles (consisting only of goodwill), comprise a significant portion of
the
Company’s total assets. Long-lived assets, including goodwill are reviewed for
impairment whenever events or changes in circumstances have indicated that
their
carrying amounts may not be recoverable. Recoverability of assets is measured
by
comparing the carrying amount of an asset to its fair value in a current
transaction between willing parties, other than in a forced liquidation sale.
Fair value was estimated by an independent appraisal of the value of the
Company.

Factors
we consider important which could trigger an impairment review include the
following:

Significant
changes in the manner of our use of the acquired assets or
the strategy of
our overall
business;

·

Significant
negative industry or economic
trends;

·

Significant
decline in our stock price for a sustained period; and

·

Our
market capitalization relative to net book
value.

When
we
determine that the carrying value of intangibles, long-lived assets and related
goodwill and enterprise level goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure
any
impairment based on comparing the carrying amount of the asset to its fair
value
in a current transaction between willing parties or, in the absence of such
measurement, on a projected discounted cash flow method using a discount rate
determined by our management to be commensurate with the risk inherent in our
current business model. Any amount of impairment so determined would be written
off as a charge to the income statement, together with an equal reduction of
the
related asset. Net intangible assets, long-lived assets and goodwill amounted
to
approximately $9.9 million as of June 30, 2008.

22

In
2002,
Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill
and Other Intangible Assets”
(“SFAS
142”) became effective and as a result, Old Point.360 ceased to amortize
approximately $26.3 million of goodwill in 2002 and an annual impairment review
thereafter. The initial test on January 1, 2002 and the Fiscal 2002 to 2007
tests performed as of September 30 of each year required no goodwill impairment.
On August 14, 2007, the Company was formed by a spin-off transaction (see Note
12 – Sale of ADS Distribution Business in the accompanying financial
statements), and a certain portion of Old Point.360’s goodwill was assigned to
the Company (see Note 3-Acquisitions for a description of the allocation
methodology). In the 2008 test performed as of June 30, 2008, the discounted
cash flow method was used to evaluate goodwill impairment and included cash
flow
estimates for 2009 and subsequent years. If actual flow performance does not
meet these expectations due to factors cited above, any resulting potential
impairment could adversely affect reported goodwill asset values and
earnings.

Accounting
for income taxes.
As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which
we
operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to
the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision
in
the statement of operations.

Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. The net deferred tax liability as of March
31, 2008 was $3.7 million. The Company did not record a valuation allowance
against its deferred tax assets as of June 30, 2008.

In
June
2006, the FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with Statement FAS 109.
This interpretation prescribes a recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance
on
derecognition of tax benefits, classification on the balance sheet, interest
and
penalties, accounting in interim periods, disclosure, and transition. As the
Company is responsible for the taxes resulting from Old Point.360’s operation
prior to the Spin-off, the Company effectively adopted FIN 48 on January 1,
2007. The Company or one of its subsidiaries files income tax returns in the
U.S. federal jurisdiction, and various state jurisdictions. With few exceptions,
the Company is no longer subject to U.S. federal, state or local income tax
examinations by tax authorities for years before 2002. The Company has analyzed
its filing positions in all of the federal and state jurisdictions where it
is
required to file income tax returns. The Company was last audited by New York
taxing authorities for the years 2002 through 2004 resulting in no change.
Old
Point.360 and, consequently, the Company, are currently under audit by The
U.S.
Internal Revenue Service for calendar 2005. The Company believes that its income
tax filing positions and deductions will be sustained and does not anticipate
any adjustments that will result in a material change to its financial position.
As a result, upon the implementation of FIN 48, the Company did not recognize
any increase in the liability for unrecognized tax benefits. In addition, the
Company did not record a cumulative effect adjustment related to the adoption
of
FIN 48.

Recent
Accounting Pronouncements

In
December 2007, the FASB issued SFAS No. 141R, “Business
Combinations” (“SFAS
141R”), which requires most identifiable assets, liabilities, non-controlling
interests, and goodwill acquired in a business combination to be recorded at
“full fair value.” SFAS 141R applies to all business combinations, including
combinations among mutual entities and combinations by contract alone. Under
Statement 141R, all business combinations will be accounted for by applying
the
acquisition method. Statement 141R is effective for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141R will
affect further acquisitions by the Company.

In
December 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements” (“SFAS
160”). SFAS 160 requires the ownership interests in subsidiaries held by parties
other than the parent to be treated as a separate component of equity and be
clearly identified, labeled, and presented in the consolidated financial
statements. SFAS 160 is effective for periods beginning on or after
December 15, 2008. Earlier adoption is prohibited. SFAS 160 has not yet
affected the Company’s financial statements.

In
January 2008, the SEC issued Staff Accounting Bulletin No. 110, “Certain
Assumptions Used in Valuation Methods”
(“SAB
100”) which amends Staff Accounting Bulletin No. 107, “Share-Based
Payment”
(“SAB
107”). SAB 110 allows for the continued use, under certain circumstances, of the
“simplified” method in developing an estimate of expected term of so-called
“plain vanilla” stock options accounted for under FAS 123R. SAB 110 amends SAB
107 to permit the use of the “simplified” method beyond December 31, 2007. The
adoption of SAB 110 did not have a significant effect on the Company’s
consolidated financial statements.

23

In
March
2008, the FASB issued SFAS No. 161. “Disclosures
about Derivative Instruments and Hedging Activities –
an
amendment of FASB Statement No, 133”
(“FAS
161”). The standard requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments, and disclosures about
credit-risk related contingent features in derivative agreements. FAS 161 is
effective for financial statements issued after November 15, 2008. The adoption
of FAS 161 will not have a significant effect on the Company’s consolidated
financial statements.

ITEM
7. A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

Market
Risk. The
Company had borrowings of $4.7 million on June 30, 2008 under term loan
agreements. One term loan was subject to variable interest rates. The weighted
average interest rate paid during fiscal 2008 was 7.65%. For variable rate
debt
outstanding at June 30, 2008, a .25% increase in interest rates will increase
annual interest expense by approximately $7,000. Amounts that may become
outstanding under the revolving credit facility provide for interest at the
banks’ prime rate minus 0%-1.00% assuming the same amount of outstanding debt or
LIBOR plus 1.5% to 2.5% and LIBOR plus 3.15% for the term loan. The Company’s
market risk exposure with respect to financial instruments is to changes in
prime or LIBOR rates.

the
six months ended June 30, 2007 (restated) and the year ended June
30,
2008

29

Consolidated
Statements of Cash Flows –

Fiscal
Years Ended December 31, 2005 and

2006,
the six months ended June 30, 2007 and the year ended June 30,
2008

30

Notes
to Consolidated Financial Statements

31

Financial
Statement Schedule:

Schedule
II – Valuation and Qualifying Accounts

56

Schedules
other than those listed above have been omitted since they are either not
required, are not applicable or
the
required information is shown in the financial statements or the related
notes.

25

REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the
Board of Directors and

Shareholders
of Point.360

Burbank,
California

We
have
audited the consolidated balance sheets of Point.360 (formerly New 360) and
its
subsidiary (collectively the “Company”) as of June 30, 2008, June 30, 2007
(restated), and December 31, 2006 (restated) and the related consolidated
statements of income (loss), invested and shareholders equity and cash flows
for
the year ended June 30, 2008, for the six months ended June 30, 2007 (restated)
(the transition period 2007), and for each of the two years in the two-year
period ended December 31, 2006 (restated). Our audits also included the
financial statement schedule of Point.360 listed in Item 15(a). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Point.360 and its
subsidiaries as of June 30, 2008, 2007(restated), and December 31, 2006
(restated) and the results of their operations and their cash flows for the
year
ended June 30, 2008, for the six months ended June 30, 2007 (the transition
period 2007), and for each of the two years in the two-year period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when
considered in relation to the basic consolidated financial statements taken
as a
whole, presents fairly in all material respects the information set forth
therein.

We
were
not engaged to examine management’s assertion about the effectiveness of Point.
360’s internal control over financial reporting as of June 30, 2008 discussed in
the accompanying Item 9A Controls and Procedures and, accordingly, we do
not express an opinion thereon.

As
discussed in Note 7 to the consolidated financial statements, the Company has
adopted the provisions of Statement of Financial Accounting Standards
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109” on July 1,
2007.

As
described in Notes 1, 13 and 14 to the financial statements, the Company has
restated its financial statements for each of the two years ended December
31,
2006 and for the six month period ending June 30, 2007 for correction of an
error in the calculation of deferred tax liability.